Automatic Enrollment and Choices of Pension Plans: An Experimental Study in Brazil

Abstract

One alternative presented in the literature to increase adhesion to pension plans is to modify the default of choices from opt in (to adhere to the plan) to opt out (leave the plan), a nudge typical of the libertarian paternalism (Kahneman, 2002). An experimental design was adopted, adapted from a tool by Hey (2007). The research was made available with the assistance of Questionpro© and sent to respondents in Brazil through social networks from July to December 2015. 241 answers were obtained. The experiment was composed of a control group and two treatment groups. In both groups, individuals made decisions throughout nine periods: five in the work stage and four in the post-retirement stage. In the control group, the participant chose if he/she wanted to save part of the income (USD 260.00 per period, equivalent to BRL 1,000.00) as well as decide which of the pension plans to contribute to. Three possible plans were offered to the participants with different risk profiles: plan 1 (with the same probability of earning 1.4% or 5.2% per period), plan 2 (1.5% or 4.3%), and plan 3 (1.6% or 3.4%). In treatment group 1, the participant was automatically enrolled in the standard plan and could decide in the following periods, if he/she wanted to continue contributing to a plan, at which percentage, and for which of the plans offered. The results suggest that the pension funds with automatic enrollment, parity contribution of the sponsor, and absence of the element of risk, positively influence the decision of adhesion to the plan. In this scenario, there was a longer permanence in this plan compared to the control scenario in which the design of the plan did not present such characteristics (p-value < 0.01). This conclusion is in line with the work of the nudge theory (Orenstein, 2013; Thaler & Sustein, 2008).